More Bad Housing News: Half of Loan Modifications Fail

by: Adam Sharp

More bad news on America’s housing front. Bloomberg reports that 51% of loan modifications have failed within 9 months.

More than half of U.S. borrowers who received loan modifications on delinquent mortgages defaulted again after nine months, according to a federal report.

The re-default rate of loans modified in the first quarter of 2009 was 51.5 percent by the end of the year, the Office of the Comptroller of the Currency and the Office of Thrift Supervision said in a joint report today. The figure, which measures payments at least 30 days late, climbed to 57.9 percent for changes made in the prior 12 months.

U.S. homeowners are struggling to make payments as depressed housing prices leave them owing more than their properties are worth. About 24 percent of properties with a mortgage were underwater in the fourth quarter, First American CoreLogic said last month. The median price of a U.S. home was $165,100 in February, down 28 percent from its peak in July 2006, according to the National Association of Realtors.

The current round of foreclosure-prevention plans have failed after just 9 months, even though they were short-sighted extend/pretend in nature — reducing interest rates to 2% for 5 years and extending loan schedules out to 40 years. They probably thought this would buy them at least a couple of years. So while banks collected a ton of fees from the govt for “trial” modifications, they obviously aren’t working.

It’ll be interesting to see what happens after the Fed ends MBS purchases, and rates (presumably) go up a bit. The homebuyer tax credit expires in April, which could also negatively affect demand. But so far the efforts appear to be an utter waste, more backdoor bank bailouts.

If anything, they only pulled demand forwards, and served to reward people lucky enough to buy during the bonanza. Buy a house a day before or after the tax credit is in effect? Tough sh*t.

Extend and Pretend Take Two: Principal Reduction (For a Few)

Some have applauded Bank of America’s (NYSE:BAC) recently announced principal reduction program, which cuts loan amounts up to 30%. But it should also be noted that BofA isn’t doing this out of the kindness of their heart. It’s part of a settlement with multiple attorneys general in connection with their sketchy Countrywide loan portfolio. The Obama administration is expected to announce a more widespread program today.

This efforts’ prospects nearly as bad as the original loan-modification programs. To qualify, borrowers must be at least 20% underwater, have an ARM or Interest-only loan, and be at least 2 months behind on their payments. The prospect of a $40,000 reduction in a loan will inspire a lot more people to be a lot later on their mortgage payments. And probably a lot of fraud losses along the way. More moral hazard incoming…